The Valley’s office market has weakened significantly since the end of 2006. Net absorption decreased substantially from 904,266 in Q3 to 491,365 in Q4. In addition, after three straight quarters of increasing, the absorption-to-completions decreased considerably to 0.45.
2007’s fourth quarter vacancy rate increased to 12.2 percent from 10.9 percent in the third quarter. The vacancy rate was up for Class A and Medical. Class A increased to 15.1 percent, which can be explained by absorption totaling only 33 percent of completions for the quarter, whereas absorption exceeded completions by 59,161 square feet in the third quarter.
Absorption dipped to 491,365 square feet in the fourth quarter. Additionally, 1,092,781 square feet of new office space entered the market, increasing the Valley’s office inventory to 38,024,741 square feet. The amount of office space currently under construction and planned in Q4 amounted to 1,519,898 square feet and 3,751,145 square feet.
The softness in the residential market is impacting the office market, as reflected in the rising vacancy rate, which has increased 64 percent. Office-using tenants serving the housing industry have been an important component of the Valley’s office market during the last 10 years. The effects of the massive layoffs that the housing industry is seeing are creating a growing amount of sublease space, which is rippling throughout the Valley’s office market.
Southern Nevada analysis and statistics compiled by Colliers International and Restrepo Consulting Group
2007 will be year for the record books. Unfortunately, it will not be on the positive side. This was the first year Northern Nevada has had negative net absorption. For those unfamiliar with net absorption, it means less office space was occupied at the end of the year than at the beginning of the year. This goes hand in hand with one of the slowest office construction years in the last decade.
The main culprit was the slowdown in residential sales and construction. Virtually every home builder in the Northern Nevada area either reduced the amount of office space they occupied by subleasing or closed down their office completely. In addition to home builders, several mortgage companies, title companies, engineering firms, and residential real estate firms also contracted. This created the largest amount of sublease space in the history of the area totaling approximately 250,000 square feet. We expect the only new construction will be build-to-suits. When we take into account our average annual absorption, we should have enough vacant space to handle normal demand for over two years with no new construction.
Going forward the area will once again be attractive to firms considering relocating to Northern Nevada. Home prices are now more affordable. Office lease rates are flat or down, depending on the submarket, with some great deals on sublease space.
Northern Nevada analysis and statistics compiled by Colliers International Reno